Steer clear, when unclear is UPL saga’s moral for investors1 min read . Updated: 13 Dec 2020, 10:33 PM IST
The company’s stock valuations have dropped by about 40% against its five-year average, analysts point out
UPL Ltd’s whistleblower saga is making investors a bit wary about its prospects. The stock of the chemicals’ company has slipped about 12% in the last two days after The Economic Times reported allegations based on a whistleblower account. The stock has not made much of a recovery even after the management issued a clarification.
Some brokers such as CLSA reiterated their buy rating after the management’s comments, but the stock has stayed weak.
“Frequent governance issues for UPL, the third time within a year, are worrying. The UPL management has clarified its position on each instance, though it seems to provide less comfort to investors for now," said analysts at Kotak Institutional Equities in a client note. Investors should “steer clear, when unclear", the report said.
The governance factors have weighed on the stock’s valuations, which have dropped by about 40% against its five-year average, analysts pointed out. UPL lost about 26% of its market capitalization in the past one year.
However, smaller agro-chemicals player PI Industries Ltd has been pulling ahead. The company recently pipped UPL to become the largest agri-business company on the Indian bourses. The one-year forward valuation of PI Industries stands at 39 times FY22 earnings compared to the 9 times for UPL, according to data from Bloomberg.
Another worry for UPL is its high debt levels. “Debt remains a key concern as net debt increased by ₹1,780 crore in the first half compared to FY20. Overall, its balance sheet has not shown a significant improvement in the first half of FY21. In 2HFY21, the company aims to repay $700 million in debt, which would be a key thing to watch out for," said analysts at Motilal Oswal Financial Services Ltd in a client note.
Investor sentiment may also remain bogged because of low cash-flow generation. “Recurring downgrades on consensus estimates amid limited conviction on optimistic guidance led forecasts, low free cash flow generation, high effective leverage and a few other issues have kept us cautious on the stock," said Kotak analysts.
The performance of UPL, which has businesses in Latin America and Europe, has been hit by the covid-19 pandemic, but analysts see a second-half recovery in business.